Owner of pizza store asking me to buy. Questions...

[Piper]

edgarhansen:

Ive seen pizza shops listed for 50K when the cash flow was 68K, and Ive seen shops listed for 240K with a cash flow of 110k.

It’s impossible to say why without digging into the financial statements. Cash-flowing 68K and asking 50K… it could mean that the place is deep in debt and the buyer will have to assume it. Perhaps the equipment is in serious disrepair and will take a large investment to keep things going.

You’ll also only see cash flow multiples of 2-3 in a place under solid management where the owner is an “overseer” only. Maybe the owner has to be there 14 hours per day, 7 days per week to achieve that 68K of cash flow. That would certainly drop the value of the business to me. With 68K in cash flow, you couldn’t afford to hire a GM and still take enough out to support yourself. That’s the old “buying a job” right there. The place wouldn’t even be worth 50K to me if that were the case.

It could also be possible that the lease is about to expire.

I might be more conservative than most with this, but I probably wouldn’t touch a business that I couldn’t guarantee 10 years more on the lease. The seller would have to have at least that much left, or the Landlord would have to provide a new lease or new options as a term of the purchase.

 

[Piper]

bodegahwy:

The numbers provided in the posts above for valuation are all ways that people use. There is no “ONE RIGHT WAY” to do this. In the end, YOU have to decide what you can live with.

I probably shouldn’t have said “the right way.” I agree with you there’s no one right way to value the business. However there are many wrong ways, and I would put multiples of revenue very high on that list.

For a business generating positive cash flow, the best way to value it is with a Discounted Cash Flow analysis. That’s what you’ll see the pros in private equity and corporate finance using. Mutiples of cash flow are really just a rule-of-thumb short cut to a full DCF analysis.

A DCF will account for:

1 - Projected cash flows. You’re not really paying for what happened, you’re paying for what you think will happen in the future.

2- Holding period (usually 5 years). Even if you plan on holding the business forever, you always value it with a specific holding period and exit strategy. After 5 or so years you’re in the long term, and forecasting cash flows, interest rates and economic conditions is just a crapshoot. It’s hazy enough at 5 years, but at least you can see some trends out that far.

3 - Required Rate Of Return (RROR). The RROR encompasses your risk level, opportunity cost, prevailing interest rates and cost of capital into a pretty decimal.

These three things are all you need to value any periodic stream of cash. If you wanted to value a bond, you could accurately price it to the penny using only the three things above. That’s really all a business is when you get right down to it… you’re paying for a stream of cash.

Unlike a bond, however, you don’t know for certain what the future cash flows will be in a business. The ability to project #1 above is where fortunes are won and lost

Now, if there is no cash flow you can throw all of the above in the garbage. That’s would become an asset sale and the true valuation lies in figuring out what used equipment is worth.

 

[Pizzamancer]

I have to chime in here and say run the hell away from this deal. The numbers are easy to play with, just depreciation alone can add thousands to the ‘profits’. Because the owner paid 150k is no reason at all to use that figure. Today cheese, gas and flour prices are much higher, and they are only going to go up for the next few years. That is going to drive down your profits, and sales as your customers feel the crunch and reduce their discretionary spending.

If you really want an existing business, look around. There are tons out there you could get for less than $45,000. An old ex-MIT of mine built out his pizza shop for $30,000 in 1996. He leased MM PS360s, hoods, make line, and POS and was up and running.

From the description of the current owner, you never know what he is hiding. Even if he is not purposely sweeping things under the carpet, he might just be off the game enough that some of the bigger things are sliding by. You would save his financial arse by bailing him out, but it might just put yours in a worse position.

 

[Dmitri]

edgarhansen, we web you mentioned is great and i think the biggest one, what you should understand is that people who are selling their businesses are usually not financially proficient, 80% of them dont know what cash flow is - and thats why their business is for sale, it’s just when broker asked them to fill up the 2 pages of basic information - that’s just numbers that where on their mind then they were filling them out, not more than that, so dont take them seriously, and when they put their gross sale on this website - minus 10-20% percent as well.

 

[papajoe]

Stay away from Pizza Pan or Oven Fresh Pizza Co. or Geppetos’.